Planning for Inventory Optimization? Ask yourself these questions

Demand uncertainty and supply rigidity often create inventory shortages. 
The immediate consequence of inventory shortages might be significant lost sales and revenue ; however, the impact of stockouts cannot be fully evaluated without understanding how inventory shortages influence long-term customer behaviour. 

In practice, the most common tactic for preventing stock outs caused by demand uncertainty is to increase inventory levels. However, this approach increases inventory holding costs and the likelihood that the firm will need to use clearance sales.

We believe that every company has a unique answer for Inventory Optimization. To find the right answer for oneself, each company needs to ask itself the below questions:

1. How do consumers react to product stockouts in both the short and long run? 
2. Are there important segment level differences in response to stockouts? 
3. Do stock outs in different types of categories have different impacts on consumers? 
4. How can insights related to the preceding questions help sellers manage inventory in a manner that increases profits?

From Demand Driven Inventory Optimization and Replenishment

“Oftentimes, the focal point of so-called supply chain efficiency projects is to uncover and exploit cost discrepancies positioned by supply chain partners in the name of “optimization”.

This technique of uncovering supply chain inefficiencies to fill the void with cost savings that might shift costs onto another portion in the supply chain is rampant in the industry. Obviously, the whole point of optimization is to take advantage of every opportunity of cost savings, not just taking advantage of trading partner inefficiencies. At risk are the constant problems of simply shifting the costs from one location to another and the actual elimination of the costs and the savings enjoyed by either the network as a whole or the end customer satisfaction.”